From the blog of an economics professor who’s usually pretty conservative about his prognostications:
I’m inclined to agree: every government program has a huge entrenched interest behind it. Seniors want Medicare and Social Security, public sector unions want to ratchet up bureaucracy, tycoons want corporate welfare and more anticompetitive regulatory capture, and the huge number of poor who pay no income tax have every incentive to push for more government spending. On the taxation side, there is significant resistance to increasing taxes and history suggests that we can’t actually squeeze out a larger fraction of tax revenue compared to GDP. The only popular kind of tax - on the rich - will raise only a small amount of revenue.
Put two and two together and I don’t see any way for the US to avoid a sovereign debt crisis. My question is: what effect will it have on ordinary folks? Will it be a simple matter of the government saying hey, we don’t actually have as much money to spend as y’all thought we did, or will it have a shock on the broader (private-sector) economy?
I had this argument 25 years ago with someone. I made the observation that housing prices could not rise at 3 time the inflation rate without collapsing in a bubble like the stock market.
If debt rises unchecked and the economy tanks then the US will trigger a world depression. There is simply no financial entity capable of stopping this from happening.
What really matters is the debt ration or debt as a percentage of GDP. We don’t really need to decrease the debt if we can stop it from growing while fixing the economy. Long term, we need to reduce the deficit during growth years so we can spend more (relatively) during down years. If Bush II had followed in Clinton’s footsteps instead of Reagan/Bush I in regards to the debt we wouldn’t have an issue with stimulus spending right now.
A very strong Republican governor failed to freeze teacher pay for a single year. If even this amount of political capital can’t even hold a single entitlement steady for a single year, what makes you think we can restrain government spending across the board?
PS: Clinton’s budget surplus was made possible only by the dot-com boom (forgetting about the off-budget expenditure trick, without which he would still have had a deficit). I’m not ruling out another technology driven economic boom occurring in the next two decades, but those things are one-shot only growth spurts. A model that relies on continuous dot-com style growth is not realistic.
To clarify: yes, Clinton did some good by reducing expenditures and raising sustainable taxes. But it had a huge political cost, and it still wouldn’t have produced a surplus if he wasn’t lucky enough to preside over the dot-com boom that raised GDP growth. The Clinton Plan cannot rescue us unless we assume that it’s going to be dot-com boom from here on out, which seems peeks outside to be at odds with the facts.
All these complaints about fiscal irresponsibility would seem a lot more sincere if Republicans displayed any sense of restraint when they hold power. When we’ve elected Republicans, they’ve outspent the Democrats. The two parties seem consistent in that the only government spending they’re opposed to is anything that the other party will get the credit for. The only difference between the two parties is that the Democrats will raise taxes and pay for their spending sprees while the Republicans want to put their spending sprees on the national credit card.
Exactly. The Democrats are the more fiscally responsible party. Which isn’t saying much considering their competition. I certainly don’t see the Republicans as likely to even try to solve the problem.
The tax cuts of 2001 were passed because the US’s finances were in too good of a shape. Supposedly the debt was on track to being paid off by 2012 when the administrations changed. Then you had 9/11 and the first recession, so there you go. So I really don’t know if you can predict with certainty what’ll happen in 10-20 years.
Drastic increases in medical productivity would do a lot to keep our economy solvent by drastically increasing the quality and lowering the cost of medical care. Maybe something like that is around the corner (robotics, outsourcing, advances in biotech, etc). Most of our long term deficits are based on medical costs in one way or another.
You don’t have to actually reduce the size of the debt. We will always maintain a debt, the financial system depends on some level of U.S. government debt. What we need to do is keep the deficit in check when the economy is good so the the ration goes down. You are correct that under Clinton the debt did not go down in absolute terms, but it did as a percentage of GNP. Think of it this way, if you go from a $50,000 debt level while making $100,000 a year to a $55,000 debt level while now making $120,000 a year you are better off.
That’s all very well in theory, but in practice it depends on a government prepared to hold the fiscal line even if the debt/GDP ratio falls for several years. A few cycles of “No more deficit” and “Long-term forecast predicts surpluses” headlines, and the left will be calling for more social spending, the right will be calling for tax cuts and every special interest in Washington will be converging on the Capitol with their hands out. How long would you expect either party to go on turning them away?
Folks, the topic of this thread is the effect of a sovereign debt crisis. I think most of us agree that a sovereign debt crisis in the works; if you don’t, lay out a way by which it can be averted, and that would be a valid topic for debate. But the blame game is not the purpose of this thread - and “put my tribe in charge - they’re better people!” is not a way out of this mess.
I assume you meant is IN the works. I don’t agree, but I don’t understand why I have to “lay out a way by which it can be averted” when I don’t agree with your supposition.
Well I suppose you could say “don’t change anything, there won’t be any sovereign debt crisis,” but that statement is not backed up by the facts. If entitlements continue to increase at the current trajectory, it becomes increasingly unlikely that the government can pay back its debts, and eventually this loss of confidence will collapse the government debt bubble. Now you can claim that there are ways to change it such that there will be a reasonable expectation of the deficit being brought under control (even if the debt isn’t paid off). Prof. Cowen underlines why he doesn’t think that such change is feasible. So to sum up, three choices:
No sovereign debt crisis if we leave everything the way it is. (Unlikely)
Yes we’re headed for one now, here are specific, politically feasible reforms A, B, and C that will prevent it
Yes we’re headed for one now, and because of interest groups and political structure it’s unlikely to be avoided (the Cowen position). Here’s what it’s going to be like.
Calling it a “soverign debt crisis” is kinda misleading. Its a “compounding growth in costs of medical care crisis”. The rest of the drivers of the deficit are pretty minor in comparison.
And I think the growth in medical costs will eventually be brought under control. Partially because just from a practical standpoint you can’t sell something thats too pricey for anyone to afford (even if it might save their life), partially because I think as medical care becomes more and more expensive the more and more pressure is brought on the politicians to do something about it, and finally because despite the ugliness of the recent health care debate, at the end of the day the US political system did show that it has the will to make money saving changes to the Health care system.
Medicare and Social Security will be slowly trimmed. This will help. These will be hard decisions, but they will be made.
Public sector unions may want more, but they won’t get it. Corporate welfare and more anticompetive regulatory capture will be lessened. The “huge number of poor who pay no income tax have every incentive to push for more government spending” is just code for “welfare” and that’s being cut back over the last 10 years. While there will always be “significant resistance to increasing taxes” it will happen. Because it has to. Just not in this terrible downturn in the economy. But, it will happen.
If we reach the point where the amount of debt actually becomes a crisis, then we’ll start getting serious about paying it off. Despite what some would claim, raising taxes would not actually end life as we know it. We’ve had higher tax rates in the past and the nation has endured. Our taxes are relatively low now precisely because the national debt is not a crisis.
There has been much speculation about the possible role of China (in the USA debt). Would they be so foolish as to stop buying US debt? If that happened, the dollar would plunge, and the Chinese central bank would take a huge loss.
Not only that, but the Chinese exporst would drop, as the prices rose.
So the Chinese had better be wary-they could wind up having the house collapse on top of them. Closed factories and massive unemployment would NOT be good for the Chinese ruling class-they might actually have to democratize the government.
